In this section:
- Appendix 1: Dividends
- Appendix 2: Royalties
- Appendix 3: Thin capitalisation
- Appendix 4: Commercial debt forgiveness
- Appendix 5: Capital works deductions and infrastructure tax offsets
- Appendix 6: Uniform capital allowances
- Appendix 7: Personal services income (PSI)
- Appendix 8: Instructions to trustees of deceased estates
- Appendix 9: Trustee instructions for beneficiaries under 18 years old - other than deceased estates
- Appendix 10: Rates of tax payable by trustees on behalf of beneficiaries under 18 years old
- Appendix 11: Closely held trust reporting
- Appendix 12: Trust assessment codes
- Appendix 13: Small business entities
Appendix 1: Dividends
An imputation system applies for taxing dividends paid by franking entities. Certain dividends (including non-share dividends) paid by franking entities, which have paid Australian tax, may have a franking credit attached. These dividends are known as franked dividends.
If the shares or interests are not held at risk as required under the holding period and related payments rules, or there is other manipulation of the imputation system, do not include the Australian franking credit in assessable income and there is no entitlement to a franking tax offset.
Trans-Tasman imputation
The Australian Government has rules, administered by the Australian Taxation Office, to allow New Zealand companies to join the Australian imputation system. The New Zealand Government has similar rules, administered by the New Zealand Inland Revenue Department, to allow Australian companies to join the New Zealand imputation system. Subject to full compliance with the Australian imputation rules, a New Zealand company that has chosen to join the Australian imputation system is able to maintain an Australian franking account and may pay dividends franked with Australian franking credits.
For dividends paid by Australian franking companies, the total amount of dividends received or credited and the franking credit is included in the assessable income of the trust to determine the relevant net income or loss.
For dividends paid by New Zealand franking companies, the amount of the dividend received or credited and the franking credit included in the assessable income of the trust can vary depending on whether or not the dividend is assessable. To work out whether the dividend is assessable income, see the Foreign income return form guide 2017.
If the dividend from the New Zealand company is assessable, you must declare it (including any supplementary dividend) as assessable foreign income even if dividend withholding tax was deducted in New Zealand. You can claim a foreign income tax offset for any New Zealand withholding tax paid on the dividend.
If the franked dividend from the New Zealand company is included in assessable income, the amount of the Australian franking credit on that dividend is also assessable income and you can claim a tax offset equal to that amount (subject to the exceptions described below).
If the recipient is entitled to a tax offset under section 207-45 of the ITAA 1997, the Australian franking credit is included in the assessable income of the recipient. The tax offset is reduced by the relevant amount of a supplementary dividend paid by the New Zealand company if:
- the supplementary dividend is paid in connection with the franked dividend
- the franked dividend and the supplementary dividend flow indirectly to the recipient because the recipient is a beneficiary or a trustee of a trust
- the recipient is entitled to foreign income tax offsets because of the distribution.
Australian resident shareholders are not entitled to a tax offset for New Zealand imputation credits which are attached to dividends paid by a New Zealand company. Australian resident shareholders are only entitled to a tax offset for Australian franking credits which are attached to those dividends.
Franking credit trading
For the franking credits to flow through to the beneficiaries both they and the trust must be qualified persons in relation to the dividend.
Qualified person
To be a qualified person in relation to a dividend a taxpayer must, during the relevant qualification period (see below), hold the shares, or an interest in the shares, at risk for 45 days (90 days for certain preference shares) not counting the days on which the shares or interests were acquired or disposed of. This is sometimes referred to as the holding period rule.
To hold the shares, or an interest in shares, at risk, the taxpayer must carry at least 30% of the risks of loss and opportunities for gain associated with the shares, or interest in the shares.
If the taxpayer does not have an obligation to make a payment in relation to a dividend (generally one passing the benefit of the dividend to another), the relevant qualification period for that dividend is the period beginning the day after the relevant shares or interests are acquired, and ending 45 days (90 days for certain preference shares) after the shares go ex-dividend. Otherwise, if the taxpayer is obliged to make, has made or is likely to make a related payment, the relevant qualification period is the period beginning 45 days (90 days for certain preference shares) before the shares go ex-dividend and ending 45 days (90 days for certain preference shares) after the shares go ex-dividend. This is sometimes referred to as the related payments rule.
Beneficiaries of trusts, other than family trusts and deceased estate trusts, will not pass these tests unless they hold a sufficient fixed interest in the shares to expose them to at least 30% of the risks and opportunities of owning the shares. They may, however, be eligible for the small shareholder exemption.
As an alternative to complying with the 45-day holding period rule, there are two other methods of attaining qualified person status.
The first exempts individual shareholders with total franking credit entitlements of less than $5,000.
The second allows certain taxpayers to elect to have a ceiling applied to franking credit entitlements. These taxpayers include:
- the trustees of listed widely held unit trusts
- unlisted very widely held unit trusts
- trustees of complying superannuation funds
- complying approved deposit funds
- pooled superannuation trusts
- life insurance companies.
The ceiling is based on a benchmark portfolio of shares. Certain investment vehicles primarily held by such taxpayers are also included.
Dividend washing integrity rule
The dividend washing integrity rule prevents you from claiming franking credits where you have received a dividend as a result of dividend washing.
Dividend washing occurs where you, or an entity connected to you, claim two sets of franking credits by:
- selling shares while retaining the right to receive a franked dividend
- repurchasing some substantially identical shares, that also have a franked dividend attached, using a special ASX trading market.
When the dividend washing integrity rule applies, you are not entitled to claim the franking credits for the second dividend. However, if your interest in the second parcel of shares exceeds the interest in the first parcel, you may be entitled to claim a portion of the franking credits for the additional shares. For more information, see ato.gov.au/dividendwashing
General anti-avoidance rule
Section 177EA of the ITAA 1936 is a general anti-avoidance rule against franking credit trading and streaming. The rule applies where a more than incidental purpose of certain arrangements is to obtain a tax advantage in relation to franking credits.
See also:
Franking credit
The franking credit from franking entities is shown at:
- M item 12 if received directly from a paying company
- D item 8 if received indirectly through a partnership or other trust.
Do not show the franking credit if the trustee was not a qualified person for the dividend.
Australian franking credits from a New Zealand franking company
The Australian franking credits attached to franked dividends received directly or indirectly from a New Zealand franking company are shown at D item 23. For credits received indirectly through a partnership or other trust, do not show the franking credit if the trustee was not a qualified person or was otherwise unable to claim a franking credit.
Show expenses that are directly related to franked distributions from a New Zealand franking company at item 16 Deductions relating to: Franked distributions. Expenses related to an unfranked distribution are shown at item 16 Deductions relating to: Australian investment income.
Where a franked dividend is received by the trustee and included in the net income of the trust a share of which is assessable to a resident beneficiary, that beneficiary may be entitled to tax offset equal to their share of franking credits attached to the franked distributions, undiminished by the expenses of the trust.
A beneficiary's share of the franking credit on a franked dividend will depend on their entitlement to the dividend, having regard to the trust deed and any relevant trustee resolution.
For the franking credits to flow to a beneficiary, both the beneficiary and the trustee must be qualified persons (satisfying the holding period and related payments rules).
If the trustee is assessable under section 98 of the ITAA 1936 on behalf of a beneficiary, the trustee may be entitled to a tax offset equal to the beneficiary's share of the franking credits.
Where the trustee is assessed on a share of the net income under section 99 or 99A of the ITAA 1936 (providing the trustee is a qualified person in relation to the franked dividend) the trustee is also entitled to a share of the franking credit. The trustee's entitlement to the franking credit is proportional to the share of the franked dividend to which no beneficiary is presently entitled.
Where the amount of the franking credit to which the trustee is entitled exceeds the trustee’s basic income tax liability, the excess will only be refundable if the net income is assessed under section 99.
Non-resident beneficiaries
Non-resident presently or specifically entitled beneficiaries are not liable to pay any Australian tax on the franked amount of dividends. Unfranked dividends and the unfranked part of franked dividends, if any, are subject to withholding tax.
Share traders
Traders of shares (including non-share equity interests) who operated as a trust and received dividends during the income year must show them at item 12.
Exempt dividends
Keep supporting records if the trust claims the whole or part of any dividend, bonus share issue or other distribution is exempt from tax, for example, because FTDT has been paid on the amount.
Foreign source dividends
Foreign source dividends (other than dividends from a New Zealand franking company) are not subject to the imputation rules. However, they are usually included in the assessable income of the trust. If the trust receives foreign source dividends, other than dividends that qualify as non-assessable non-exempt income under sections 23AI and 23AK of the ITAA 1936, include these amounts at item 23.
Unfranked dividends
An unfranked dividend may include the unfranked part of a partly franked dividend for reporting purposes.
Unfranked dividends and the TOFA rules
The TOFA rules may apply to some or all of the unfranked dividends that a trust receives. Where this is the case, such amounts are still shown at item 12 Dividends and must also be shown at item 31 Taxation of financial arrangements (TOFA).